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Month: May 2015

There are a lot of myths and misconceptions about what exactly economics is and what us economists mean when we say certain phrases. Unfortunately, a lot of that is our own doing: for all our collective brainpower, we are incredibly bad at naming things. I’ve attempted to address some of these misnomers in the past, now let me tackle one very close to my heart: laissez-faire economics.

I’m pretty sure it’s blatantly obvious to you, dear readers, that I am a free market economist. We are sometimes referred to as “laissez-faire” (French for “let alone” or “hands off”) economists. The implication of such terminology, however, is that there is no active participation in the market, that whatever will be will be. But this is not a “Jesus, take the wheel” situation. In order for a market economy to function, it needs active participation. What we don’t want is government, and specifically government, to take the wheel. Individuals will drive their own lives toward their goals, but not governments. Individuals will interact with one another to solve economic problems, but we do not want it driven by government. Individuals will help one another, but we don’t want it driven by government. To quote the character Hayek from one of the nerdiest/greatest music videos of all time:

I don’t want to do nothing, there’s plenty to do

My question is, who plans for who?

I want plans by the many, not by the few

…

Give us a chance so we can discover

the most valuable ways to serve one another.

So, it’s really incorrect to say we want a hands-off approach to the economy. It’d be more accurate to say we want a government-hands-off approach.

Public Good arguments are often used by proponents of government intervention in the economy to justify their arguments. They use it to justify government intervention in education, health care, utilities, the Internet, etc. But these arguments do not hold up. To know why, we must first discuss what exactly a public good is.

A public good is a good/service that is non-rival (one’s consumption doesn’t prevent someone else from consuming it) and non-excludable (one cannot prevent another from enjoying the resource). Fireworks are the textbook example of a public good. If a person shoots off fireworks, he cannot reasonably prevent people from watching them. Likewise, each person’s ability to enjoy the firework show doesn’t inhibit anyone else’s ability to enjoy the show. National defense is another example.

With public goods, one tends to get the free rider problem. People can benefit from the good/service without paying (think, for example, a person who watches the fireworks show from his porch rather than buying a ticket to the field). This can cause too few of the public good to be produced even if there is ample demand. Government can step up to provide the good (and, in many cases, this is a legitimate function of government. Police and national defense come readily to mind).

So, why don’t other things, like medical care or education fit this bill? Simply because they are not public goods. Medical care is both rival and excludable (one person’s “consumption” of a doctor’s time prevents another from consuming it) and excludable (a doctor can turn away patients). Education is similar, although it is just excludable.

In conclusion, there may be other arguments for medical care and education to be supplied by government, but public good analysis isn’t one of them.

I had a thought regarding minimum wage and price floors today. My thought is this:

Minimum wage doesn’t have the same severe consequences that other forms of price control (like gouging legislation or gas price caps). Part of that is because the increase is phased in, but I also wonder if some of it is due to that, in the US anyway, prices tend to rise over time. This would mean that any floor would, naturally, be ineffective after a short period (or would become less effective over time).

What I am looking for you, dear readers, is information on other price floors (like milk supports). I’d like to see how accurate my thought is over multiple items. I’d also like to see if linking price floors to some inflation measurement is more likely to cause the negative effects to be more noticeable then a floor that is only set at a nominal place.

Aside from the economic reasons I favor smaller government, there’s an intellectual one, too. Namely, I fail to see why I should let someone who makes simple factual and mathematical errors make decisions on my life. Take, for example, this recent meme about Bernie Sanders (I-VT) that’s made its way around my Facebook newsfeed today:

Since this came from the senator’s official Facebook, I’m assuming he did say this (one of the difficult things about the Internet is it is difficult to verify the authenticity of quotes).

It’s hard to know where to start here since there is so much wrong in just these three sentences. I guess let’s start with the big picture:

The senator makes a huge mathematical mistake. He confuses relative with absolute. Yes, corporate income tax’s share of total government revenues has fallen from 33% to 9%, but that doesn’t mean that corporate taxes are any lower. In 1955, corporate tax revenue was $17.9 billion ($158.2 billion in 2014 dollars). In 2014, corporate income tax is $320.7 billion, 102.7% higher than 1955. (Source: Tax Policy Center Inflation calculations are done using the BLS Inflation Calculator)

So, why did corporate tax share of taxes fall? Simple math:

A share (or proportion) of a portion is determined by (X/Y), where X is the portion in question and Y is the total. If X increases and Y increases at a faster pace, then X’s share falls. It does not mathematically follow that X is smaller (although that is sometimes the conclusion drawn, as in this case with the senator).

Which leads us to the third point. The senator says that taxes (or lack thereof) are the cause of a surplus/deficit. Again, that is categorically incorrect. I refer you to the US government. You’ll see that taxes, as a percentage of GDP, were actually lower in 1955 (16.1%) than they were in 2014 (17.5%) (Source: OMB, Historical Tables, Table 1.2). So why was there a smaller deficit in 1955? The government was spending less. Government outlays in 1955 were 16.8% of GDP (leading to a deficit of 0.7%) vs. 20.3% in 2014 (leading to a deficit of 2.8%). So, taxes didn’t shrink. They rose. Just spending rose faster.

So, want to better understand why we have a federal deficit? It’s because spending has outpaced income (and no, higher taxes won’t work).

According to Reuters, McDonalds is changing the way they do business. Why? To win back consumers. McDonalds has had difficulty turning a profit the past few years, so they’re hoping new tactics can get consumers (and their money) back.

This is an important demonstration of one of the iron-clad laws of economics: the consumer is king. In order for a transaction to take place, there must be two willing parties. If one party doesn’t wish to partake, no transaction occurs. This is the issue with McDonalds, and as such it needs to change. The profit motive is extraordinarily powerful.

Also, notice something else: McDonalds is one of the largest companies in the world. It had revenues of $27.4 billion last year. And yet, it had no power to compel customers to purchase its items. In fact, it has to reform to meet consumer demands, not the other way around. This may come as a surprise to many folks who believe corporations have extraordinary power over the people.

Perhaps it is because I am neck-deep in it, but economics seems to me to be one profession with a lot of myths surrounding it. Outside of the few of us in this exclusive club, few truly understand what economics is. Some see it as money, but that’s merely part of it. Some see it as business, but that’s just a single part of it, too. Others see it as politics. While I wish it weren’t true, that is a part of economics as well. Economics is hard to describe, but I think Don Boudreaux said it best:

For me, economics is largely about sparking the right questions. Asking the right questions, even if it is impossible to give 100% correct or very detailed answers to those questions, goes a surprisingly long way toward ensuring that thinking about the economy is sound.

I couldn’t agree more. Economics is a philosophy first and foremost. Like all the philosophies (biology, sociology, mathematics, etc), the answer isn’t so much a destination as it is a journey. By asking the right questions, and by exploring the answers, we can achieve better knowledge. Economics is a form of thinking. The best econ textbooks and “layman’s” books I’ve read have focused on this aspect of it. There’s a rather fantastic book out there by Robert Heilbroner, “The Worldly Philosophers,” that explores the great thinkers of my chosen field. I highly recommend it. Other great books include Henry Hazlitt’s “Economics in One Lesson” and Steven Landsburg’s “The Armchair Economist.” They all focus, not on models and formulas, but on thinking and reasoning. They focus on the logic of these models and teach readers to look beyond the “seen” to the “unseen.”

The economic way of thinking can (and should, but I’m biased) be applied to things far more than the stock market or profits. It can solve social issues (“how to best feed the poor?” or “how to end discrimination?”), entertainment (“how to build a good baseball team?”), politics (“how to determine and pass good policy?”), and so much more. It’s damn near impossible to separate economics from life because economics is life.